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You're the boss when it comes to retirement savings

By Dave Burdick, The Denver Post

Updated:
07/15/2013 12:03:50 PM EDT

Want more in retirement? Ask yourself for a raise (Jeff Neumann)

Michael Preston, who is retired, is saving for retirement.

The 69-year-old was a professor of English at the University of Colorado at Boulder until the end of last year. His wife, Cathy, 61, plans to retire from her job as a senior instructor of English at CU next year.

"Retirement income for me wasn't one day you go off the CU payroll and the next day you go on full-time retirement income," Michael says. "Because my wife is still working, we're kind of phasing things in and trying to keep control of things like expenses."

Their continued focus on the future helps them put money away and also keeps them in the habit of living on less.

Preston says that their monthly household income is around $7,000 — approximately $3,000 in Cathy's take-home pay, $2,000 in his retirement income after withholding for taxes, and $2,000 in his Social Security income.

He says that, of that, they live on about $4,000 and save about $3,000 per month — in anticipation of Cathy's impending retirement.

Since 1976, Michael had worked at CU, where faculty have a required retirement-plan contribution of 5 percent of gross compensation. The school contributes 10 percent, for a total of 15 percent of gross compensation saved for retirement.

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While that's not uncommon in academia, compare it to the average personal savings rate in the U.S.: 3.2 percent in May of this year, according to the Bureau of Economic Analysis. Or compare it to one of the most effective innovations in convincing workers to save for retirement, automatic enrollment.
Companies using automatic enrollment allow new employees to opt out of contributing to a 401(k) plan, but by default start them off saving some set percentage of their pay, say 3 percent. Often, that will tick up by 1 percentage point per year until it hits some set mark, maybe in the low teens.

With one earner retired, the Prestons live on a little over half of their take-home pay. That includes some considerations for the daughter and granddaughter living with them at the moment. The rest is being saved.

Know your priorities

When people talk about outliving their resources, they mean they've run out of pay for themselves. Maybe in retirement they withdrew at a faster rate than their principal grew and steadily ate into it, maybe something catastrophic happened and they had to withdraw a large sum (taking a big tax hit before they could even address the problem), or maybe they just never saved enough in the first place.

"People have different retirement goals," says Denver-based certified financial planner Alex Khandelwal. "Generally people talk about a 4 percent withdrawal rate after retirement." That means having enough invested so you can withdraw as little as 4 percent of your investment each year — on the assumption that it's growing faster than that and your withdrawals only take from that growth, and not the principal investment.

"Another rule of thumb, some planners say that a couple would need 80 percent of their income in retirement depending on their quality of living." That rule presumes that people will simply be less active and more thrifty in retirement.

Some of those figures, though, are sounding dated. Michael Preston, for example, cited the 4 percent withdrawal rate — as well as 3.8 and 3.6 as he continued to study retirement trends throughout his career. Khandelwal is skeptical of general rules, too.

"To be honest, I'm more conservative," he says. "The people I know and my clients, they actually spend as much or more in retirement because they have more to do, because they have travel and grandkids."

People should consider the type of retirement they want.

"They should be asking themselves when they want to retire, what they want to do in retirement," he says.

Clear the obstacles

Preston says he didn't have a target in mind — no big number that he carried around under his arm like in the commercials, no ideal monthly income that he was trying to hit, no nothing. But when he talks about how his family prepared for retirement, it's clear that one thing was important: paying down all debts.

"Four years ago, we were a little more than $175,000 in debt, and that was all paid off by last August," he says. The debt was what people refer to as "good debt" — a mortgage and their daughter's student loans.

To help make the push, he started drawing his Social Security benefits at 66.

"I had to do some pretty fancy calculating," he says. He knew that he'd get larger payments if he waited until he was 70, "but if you use that money for four years to pay off your debts, you're not paying the interest," he says. "We felt more comfortable with the debts paid."

More important, he could afford to retire — and still save for retirement.

Pay your own salary

Jerry Gill, certified financial planner and chief operating officer of MJ Smith and Associates, tells a story that doesn't sound uncommon about a family that had been used to an income a little over $100,000.

"Their total Social Security is about $30,000, and they want to live off very close to what he was making when he was working," Gill says. "His question was, 'How can I make up the other $80,000?' Here's a guy that's already retired and asking that question."

The overly optimistic retiree wants someone to pay his old salary, but nobody's raising a hand to volunteer. Suffice it to say Gill doesn't sound hopeful.

He runs through the ways that retirement has changed over the years: It used to be that he saw people retiring and relying on pension plans, then came IRAs and the 401(k) boom ,and pensions slipped out of the picture.

The Employee Benefit Research Institute reports that from 1979 to 2011, private-sector employees' participation in pension plans dropped from 38 to 14 percent.

These days, according to the Bureau of Labor Statistics, only 10 percent of private industry establishments offer them at all (although those that do are more likely to be larger companies, covering more people).

That optimistic retiree was probably on the hook for paying his own "salary" in retirement all along, but didn't think about it much until too late. But, Gill said, if a 40-year-old had raised the same question, he'd be in better shape.

"If we know what his estimated Social Security income will be, as in this case, say $30,000 of today's dollars, and we know we've got to generate an additional $50,000, that leads us to start making some assumptions about how big a pot that has to be."

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